With the summer holidays over and the kids back to school, UK households were given some relief in September. In the UK, wage growth finally caught up with rising prices, inflation fell slightly, surprising economists, and The Bank of England chose to keep the base rate unchanged, ending a streak of monthly increases. Elsewhere, the European Central Bank raised rates to combat inflation, while inflation itself fell to its lowest level in nearly a year. In the US, unemployment rose unexpectedly, but retail sales exceeded expectations.
The Federal Reserve continued to reduce its bond holdings while signalling a future rate increase. In Japan, interest rates remained unchanged. Chinese property developers received government support, but economic activity remained disappointing. Bond yields surged, causing concerns among investors. Equities delivered a mixed performance, with emerging markets and the UK seeing gains while the Nasdaq had its worst month of the year. Commodities performed well, particularly oil, agricultural prices, and industrial metals.
In the UK, wage growth finally caught up with rising prices for the first time in more than a year, with regular pay (excluding bonuses) increasing by 7.8%(1) from May to July, compared to the same period last year. Inflation also rose at the same pace during this time. However, despite rising energy prices, headline inflation actually fell in August to 6.7%(2) from 6.8%(2) in July. Core inflation, which excludes energy and food, alcohol, and tobacco, also decreased to 6.2%(3). Inflation in the UK has been steadily declining from its peak of 11.1%(4) in October 2022. It was widely assumed that The Bank of England (BoE) would raise rates in September by 0.25%. It therefore came as a surprise to investors and mortgage holders when the bank left rates unchanged, as the rate-setting Committee was encouraged by inflation continuing to fall. This decision marked the end of a streak of 14 consecutive monthly rate increases. While UK mortgage approvals fell in August as expected, net mortgage lending, which typically lags behind approvals by around a month, reached its highest level since January. Additionally, house prices experienced a decline of 5.3%(5) in the 12 months leading up to September, according to Nationwide.
In the Eurozone, the European Central Bank raised rates to a record 4%(6) in early September, marking the 10th consecutive monthly rate rise. This decision was made in an effort to combat inflation, prioritising it over a weakening economy. Oil markets indicated tighter supply and higher prices for the rest of the year, contributing to the rate hike. In August, inflation stood at 5.2%(7) in the Eurozone, however, by the end of September, inflation fell to 4.3%(7), marking the lowest level since October 2021.
In the US, unemployment unexpectedly rose to 3.8%(8) in August, a significant increase from July and the highest level since February 2022. The real unemployment rate also jumped to 7.1%(9), (the real unemployment rate includes underemployed, marginally attached, and discouraged workers). Month-on-month Core Consumer Price Inflation (CPI) increased by 0.3%(10) in August, surpassing estimates of 0.2%(10), with year-on-year headline inflation rising to 3.7%(11) up from 3.2%(11). Energy prices were the main driver of higher-than-expected non-core inflation, with US crude oil prices reaching over $90(12) a barrel for the first time since November 2022. On a positive note, retail sales in August surprised economists by rising 0.6%(13), above the predicted 0.4%(13) growth. Despite the rise in unemployment and inflation, the Federal Reserve (Fed) continued to reduce its bond holdings while keeping rates steady in September. However, the Fed signalled its intention to raise rates once more before the end of 2023. Notably, the Fed revised its economic growth expectations, anticipating a rise in gross domestic product (GDP) to 2.1%(14) this year. Consumer confidence decreased in September, although it remained positive overall as consumer expectations softened.
In Japan, the Bank of Japan (BoJ) remained the only major central bank to not raise interest rates, leaving them at -0.1%(15), where inflation is milder compared to other developed markets.
In emerging markets, Chinese property developers got a boost in early September after a leading real estate developer, Country Garden, managed to avoid default, with some government support. Despite this support, the real estate outlook worsened in China however, retail sales in August surprised by growing 4.6%(16) compared to the previous year, surpassing expectations of 3% growth. This growth rate was also higher than the 2.5%(16) year-on-year pace set in July. While retail sales were encouraging, China's economic activity continued to disappoint, with corporate borrowing falling to low levels and loan rejections and average loan rates spiking. Despite the People's Bank of China's efforts to lower borrowing costs, lower corporate activity had a negative impact on the residential real estate market, resulting in slower sales and weaker prices despite a notable drop in mortgage rates.
Bond yields surged in September, causing concerns among investors about the possible extent of a recession. The US 10-year Treasury yields reached a 15-year high during this period. As a result, investors lifted their foot off the gas, taking profits from the returns made up until the end of August in the S&P 500 and Nasdaq. In terms of asset performance, equities ranked as the second-worst-performing asset class in September, although the overall picture was mixed. While the main US and MSCI Europe ex-UK indices closed the month on a downward trend, emerging markets, Japan, and the main UK indices saw positive gains. Among the indices we monitor, the MSCI China H index emerged as the top performer, with a return of 5.86%(17). It was closely followed by the MSCI India index, which closed up 5.61%(18). On the other hand, the MSCI ACWI Information Technology & Communication Services and the Nasdaq, both heavily influenced by technology stocks, ended the month with negative returns of -3%(19) and -1.45%(20), respectively. This marked the worst month for the Nasdaq in 2023 to date.
In September, the US dollar experienced a significant rise due to multi-year highs in US Treasury yields, whereas the British pound had its worst month of the year. It appears that the market is acknowledging the fact that higher rates will persist for a longer period, as the Federal Reserve adjusted its projections for reducing rates in 2024. Investors are starting to understand that heavily indebted companies might face challenges when it comes to refinancing their loans, which is causing yields to increase (remember, yields rise when bond prices fall). As a result, investors are demanding greater compensation to account for the potential risk of higher default rates.
For the third month in a row, commodities emerged as the top-performing asset class. This boost was fuelled by the price of oil reaching its highest point of the year, as the anticipation of a reduced supply outweighed concerns about slower economic growth. As a result, the increased oil prices had a ripple effect on agricultural prices and industrial metals. Additionally, the price of uranium experienced a significant upward movement. Despite this positive trend, LBMA Gold Bullion ended the month with a slight decrease in returns of -0.35%(21). The Bloomberg Commodity index saw a return of 3.09%(22) in September.
REITS continued to struggle, as they have throughout much of 2023. REITS were again the worst-performing asset class in September with the MSCI ACWI/REITS index returning -3.93%(23), not helped by higher yields on bonds providing a lower-risk opportunity for investors hunting for yield. The sector was also dragged lower as contagion fears from the troubled Chinese property market continued to weigh on sentiment.
Growth as an investment style underperformed Value through September, with Growth stocks returning -1.96%(24) versus Value stocks returning 0.68%(25) based on MSCI ACWI Growth and MSCI ACWI Value index data. This probably comes as no surprise given technology stocks struggled to make gains in September while commodities outperformed.
Considerations for long-term investors
Every month we write about what has happened in the world from an economic standpoint and how those events have impacted returns across markets. We do this to provide context to how your investments might have performed in the short-term, and sometimes these short-term movements can have a lasting impact on your returns even over the long-term.
As we know, the global economy is interconnected and economic events in one country can have a ripple effect around the world. We have written about this many times before, but it is always worth mentioning again; diversification is an important part of any portfolio allocation decisions. But diversification doesn't look the same for every investor, and it shouldn't. Every investor has their own circumstances, goals, risk tolerance and time horizon, and your portfolio should reflect your situation, not some general rule of thumb. But the principle and purpose of diversification - to help manage volatility and risk by spreading your investments across different asset classes, industries, or geographies - is the same. Being up to date with what is happening in the world can help you understand how different asset classes, industries or even investment styles are correlated and ultimately help you make more informed investment decisions.
(1) Source: Average weekly earnings in Great Britain: September 2023, Office for National Statistics, ons.gov.uk, 04/10/2023
(8) Source: U.S. Unemployment Rate Investing.com, 04/10/2023
(9) Source: Total Unemployed, Plus All Persons Marginally Attached to the Labor Force, Plus Total Employed Part Time for Economic Reasons, as a Percent of the Civilian Labor Force Plus All Persons Marginally Attached to the Labor Force (U-6), St. Louis FED, fred.stlouisfed.org, 04/10/2023
(13) Source: U.S. Core Retail Sales MoM Investing.com, 04/10/2023
(16) Source: China Retail Sales YoY, Investing.com, 04/10/2023
(17) - (25) Source: FE Analytics, price spread bid to bid in pounds sterling (for the period 31/08/2023 - 30/09/2023), 03/10/2023
Date of publication: 6th October 2023
The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.
When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.